10/24/2008 @ 6:00AM

Capitalism Revisited

Amid the financial crisis, some 40,000 of New York’s 185,700 Wall Street jobs could be lost. The bailout is not exactly offering a great deal of confidence to the financial markets. We are all losing a lot of money. Fear runs through the system like a chilling shiver in the middle of the night.

But is there a silver lining in this nightmare?

I have long been troubled by the fact that Wall Street recruits some of the most highly educated talent in America into jobs that do not involve “building” or “leading.” Rather, these professionals spend their lives “trading”–buying and selling equities, for example, in companies that other people have built with their blood, sweat and hearts. And of late, it appears that the best and the brightest have been applying their creativity and innovation into scams, mostly.

Professor Rakesh Khurana of Harvard Business School has recently written a critique of the evolution of business schools over the past 50 years. In his book From Higher Aims to Hired Hands, he argues that important business schools, including Harvard, have lost track of their original mission to produce leaders who can help the economy run better.

In a review of the book, The Wall Street Journal observed: “In the current environment, many brilliant young MBAs don’t aspire to be corporate chief executive officers, who struggle to uphold their agendas against pressure from all sides. These students would rather be consultants who earn big money fomenting change. Better yet, they want to be the powerful investors who hire and fire CEOs.”

Indeed, we have arrived at a point in history when grooming leaders capable of creating, building and growing sustainable enterprises is no longer the central objective of the nation’s premier academic institutions. Furthermore, rather than reinforcing a leadership-driven value system, business schools today promote a value system driven by avarice and opportunism.

The finance and consulting industries are full of people with MBA degrees who have never “done it before” but reap grandiose salaries by moving money from here to there, or by dispensing high-level, arm-waving “advice” that is hardly actionable or rooted in practicality.

Judy Estrin, one of Silicon Valley’s beloved entrepreneurs, is also troubled by this phenomenon. In her new book Closing the Innovation Gap, she points out the same problems around short-term thinking, opportunism and unbridled gold digging that has taken control of some of the most promising young minds of America.

In Silicon Valley, venture capitalists without much of an operating background constitute a trigger-happy lot, operating based on spreadsheets rather than experience or intuition. Of course, there are exceptions: VCs like Don Lucas, John Doerr and Mike Moritz have created enormous value, and have effectively helped build the ecosystem as we know it today. Nonetheless, the few rounds of Silicon Valley gold rushes have made it possible for opportunists who have also managed to flourish.

As for the compensations, general partners at venture firms make anywhere between $1 million to $3 million a year without counting performance incentives. Private equity firms pay a lot more, and it is not unheard of that partners at these firms make $50 million to $100 million a year. Then of course, there are the hedge fund managers, who are also absurdly heavily compensated.

In contrast, the poor entrepreneur bootstraps a start-up, takes enormous risks, and if she raises venture money, the first thing a VC does is to restrict her salary. Indeed, Silicon Valley startup CEOs are a dramatically under-paid bunch. For what it takes to do the job–the kind of stress, travel, opportunity cost, failure rates–many savvy entrepreneurs and executives have figured out that it isn’t worth it to be the CEO of a venture-funded start-up, especially if you have other options.

I would go so far as to submit, working for a VC-funded start-up is more like having any other job than true entrepreneurship where you actually are your own boss. You get fired and washed out of your equity stake based on the VC’s whims. This may be perfectly legitimate at times, since not all entrepreneurs can become good CEOs of larger companies. But often, these decisions are gut reactions, and entrepreneurs get slaughtered due to the VC’s lack of experience or seasoned intuition.

Throughout history, it is the entrepreneurs who have built companies and shaped economies, not money managers. It is just plain wrong that we have created a system that compensates these builders at rates that are so far below the money managers.

It is incredibly important for us to solve this problem and come up with a sustainable business model and incentive structure. Otherwise, talent will continue to flock to unworthy causes.

The current financial crisis may have created a perfect moment to revisit the entire structure of capitalism as we see it today.

Both Wall Street and Silicon Valley’s venture capital industry will experience a shakeout in the upcoming quarters. My primary message to the talented professionals who have lost their big-money finance jobs is to fundamentally switch gears. Become entrepreneurs. Create. Innovate. Lead. Add value. (See: Entrepreneur Journeys.)

Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley. She has founded three companies and writes a business blog, Sramana Mitra on Strategy. She has a master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Her first book,Entrepreneur Journeys (Volume One) is available from Amazon.com.